European Investor Update
June/July 2004
Safe Harbor Statement
DTE Energy expressly disclaims any current intention to update any forward-looking statements contained in
this document as a result of new information or future events or developments. Words such as “anticipate,”
“believe,” “expect,” “projected” and “goals” signify forward-looking statements. Forward-looking statements
are not guarantees of future results and conditions but rather are subject to various assumptions, risks and
uncertainties. This press release contains forward-looking statements about DTE Energy’s financial results
and estimates of future prospects, and actual results may differ materially. Factors that may impact forwardlooking statements include, but are not limited to, timing and extent of changes in interest rates; access to the
capital markets and capital market conditions and other financing efforts which can be affected by credit
agency ratings requirements; ability to utilize Section 29 tax credits or sell interest in facilities producing such
credits; the level of borrowings; the effects of weather and other natural phenomena on operations and actual
sales; economic climate and growth in the geographic areas in which DTE Energy does business; unplanned
outages; the cost of protecting assets against or damage due to terrorism; nuclear regulations and risks
associated with nuclear operations; the grant of rate relief by the MPSC for the utilities; changes in the cost of
fuel, purchased power and natural gas; the effects of competition; the implementation of electric and gas
customer choice programs; the implementation of electric and gas utility restructuring in Michigan;
environmental issues, including changes in the climate, and regulations, and the contributions to earnings by
non-regulated businesses. This press release should also be read in conjunction with the forward-looking
statements in DTE Energy’s, MichCon’s and Detroit Edison’s 2003 Form 10-K Item 1, and in conjunction with
other SEC reports filed by DTE Energy, MichCon and Detroit Edison.
2
Participants
• Anthony F. Earley, Jr.
– Chairman and Chief Executive Officer
• David E. Meador
– Senior Vice President and Chief Financial Officer
• Peter J. Pintar
– Director of Investor Relations and Technology Investments
3
Outline
• DTE Energy is a solid company with a consistent
long-term strategy
• DTE Energy is addressing its current challenges
• DTE Energy represents an attractive investment
opportunity
4
DTE Energy Overview
Utility Platform
Non-Regulated Platform
Power and Industrial Projects
•
•
•
•
Non-conventional Gas Production
• Michigan Gas Production
• Shale and Coalbed Methane
• Landfill Gas
Fuel Transportation and Marketing
• Coal Transportation and Marketing
• Gas Pipelines and Storage
• Energy Trading and Marketing
Generates and distributes electricity
throughout Southeastern Michigan
Produces, gathers, transmits, stores
and distributes natural gas throughout
Michigan
On-site Energy Projects
Steel-Related Projects
Power Generation with Services
Waste Coal Recovery
5
DTE Energy Geography
Regional Area
of Focus
Synfuels
On-Site Energy Projects
Coke Batteries
Biomass
6
Consistent Business Strategy
• Since 1997, DTE Energy has had a consistent business
strategy – a strong regulated utility base coupled with
consistent growth in our non-regulated portfolio
• The regulated utility base is formed by two companies:
– Detroit Edison, an integrated electric utility
– MichCon, a natural gas distribution company
• The non-regulated portfolio is a group of inter-related
businesses that leverage the knowledge and expertise
originally developed in the regulated businesses
• Anchoring this strategy is a commitment to balance sheet
strength
• On a long-term basis, this model has provided consistent
shareholder value
7
DTE Energy’s Solid Asset
Portfolio – Detroit Edison
Revenues (2003)
$3,695M
Residential
Commercial
Industrial
Other
40%
38%
18%
4%
Requested ROE
11.5%
Requested Equity Level
$3.2B
Requested Debt/Equity
50/50
Expected Service Territory
Load Growth
1-2%
•
Detroit Edison is an integrated electric
utility primarily serving the metropolitan
Detroit area
•
Ninth largest U.S. electric utility
•
Although the region has a strong industrial
concentration, the company’s revenue base
is diverse, with no single customer
comprising more than 5% of revenues
•
Both Detroit Edison’s generating and
distribution assets are fully regulated
•
Currently ~60% of customers are subject to
rate caps which fully expire on 1/1/2006
•
As the rate caps expire, all customers will
be effectively transitioned to the Power
Supply Recovery Clause (PSCR), a
mechanism that passes fuel and purchased
power costs through to customers
•
Detroit Edison has a history of reasonable
returns and is currently undergoing its first
rate case in 10 years
Detroit Edison Historical ROE
13.6%
11.8%
1998
11.8%
1999
11.1%
2000
11.7%
9.7%
2001
2002
2003
8
DTE Energy’s Solid Asset
Portfolio – Detroit Edison
Generation Assets
Generation Fuel Mix (2003)
~46,000 GWh
Gas/Oil 1%
•
Nuclear 18%
•
Coal 81%
•
•
ECAR* Dispatch Curve
Summer 2005
$80
Detroit Edison
power plants
$/MWh
$60
•
Represents ~67% of total
generating capacity
$40
Low cost western coal is the
dominant fuel source of Detroit
Edison’s efficient generating fleet
The company’s expertise in coal
sourcing and transportation
enhances the fleet’s cost profile
Our single nuclear unit, Fermi 2,
is well regarded in the industry
In 2001, the company securitized
the Fermi 2 nuclear plant which
essentially removed $1.8 billion
in risk from the balance sheet
Detroit Edison’s generation fleet
compares favorably versus
others in the region
$20
Min Annual
Demand
0
25,000
50,000
Avg. Annual
Demand
75,000
Cumulative MW
Summer
Peak
Demand
100,000
* East Central Area Reliability Region comprised primarily
of Michigan, Indiana, Ohio and western Pennsylvania
9
DTE Energy’s Solid Asset
Portfolio – MichCon
Assets (2003)
•
$2.98B
Revenues (2003)
$1,492M
Residential
Commercial
Industrial & Other
73%
23%
4%
•
•
Requested ROE
11.5%
•
Requested Equity Level
$875M
Requested Debt/Equity
50/50
•
MichCon Historical ROE
15.3%
•
14.9%
12.2%
8.9%
6.6%
5.3%
•
1998
1999
2000
2001
2002
2003
MichCon is a natural gas local distribution
company serving the metropolitan Detroit
area and western Michigan
Fifth largest U.S. natural gas LDC
Has a large residential customer base, that
produces a stable revenue stream
124 bcf of gas storage assets, in addition,
DTE Energy owns 51 bcf of non-regulated
storage
MichCon’s profit margins derive from the
physical distribution of natural gas, not
from the commodity itself. The commodity
price impacts are passed through to
customers
The primary economic driver of MichCon
is weather. Given the large residential
base, general economic conditions have a
much smaller impact
MichCon has a history of reasonable
returns, but is currently undergoing its
first rate case in 10 years
10
Overview of DTE Energy’s NonRegulated Businesses
Power and Industrial Projects
Description
On-site Energy Projects
• Investments in energy production facilities on the sites of
large energy users
Steel-Related Projects
• Three coke batteries and two pulverized coal injection
projects
Power Generation with Services
• Asset management services for power projects
Waste Coal Recovery
• Own proprietary technology that reclaims waste coal
Non-conventional Gas Production
Michigan Gas Production
• Northern Michigan Antrim Shale gas production
Shale and Coal-bed Methane
• Development and production of sites
Landfill Gas (Biomass)
• Own and operate landfill gas recovery facilities
Fuel Transportation and Marketing
Coal Transportation and Marketing
• Largest transporter of coal to third party customers in
North America
Gas Pipelines and Storage
• Vector pipeline, 51 bcf of storage
Energy Trading and Marketing
• Physical power marketing and structured transactions
11
DTE Energy’s Approach to Building
Non-Regulated Businesses
Core Skills
Coke
Battery
Business
Synthetic
Fuels
Business
Detroit Edison’s
knowledge of
industrial sector
Experience with
tax-advantaged
businesses at
DTE Biomass
Coal handling
expertise at
Detroit Edison
Coal
Services/
Transport.
• DTE Energy’s non-regulated
businesses leverage our
core skills
On-Site
Energy
Projects
Waste
Coal
Recovery
• Investments are generally
made in incremental steps in
order to better understand
the business before making
more substantial
investments
• As these businesses mature,
they serve as the platform to
develop future businesses
• This approach has helped
DTE Energy avoid the recent
industry pitfalls
12
DTE Energy’s Approach to NonRegulated Businesses has
Produced Solid Growth and
Returns
Non-Regulated Returns
Non-Regulated Net Income
($ millions)
$194$249
$207
$228
$162
$68
1999
$84
2000
2001
2002
2003 2004E
Invested
Capital
Energy
Services
Average 2001-2003
Return on
After-Tax
Capital
ROE
$810
21%
28%
Coal Services
$60
23%
>30%
Biomass
Energy
$40
14%
16%
$440
7%
7%
Gas
Production &
Midstream
13
DTE Energy’s Business
Strategy is Anchored by a
Strong Balance Sheet
60%
DTE Energy Leverage*
55%
50%
• This was achieved without
having to resort to a ‘back-tobasics’ strategy
45%
40%
1999
2000
2001
2002
2003
Leverage of Industry Peers
70%
60%
50%
40%
• Despite the problems that have
plagued the industry, DTE
Energy has been able to
maintain a strong balance sheet
• Despite the current challenges,
DTE Energy’s leverage has not
been negatively impacted
• Compared to industry peers with
similar credit profiles, DTE
Energy’s leverage compares
favorably
30%
20%
14
* Excludes securitization debt, MichCon short-term debt and quasi-equity instruments
Outline
• DTE Energy is a solid company with a consistent
long-term strategy
• DTE Energy is addressing its current challenges
• DTE Energy represents an attractive investment
opportunity
15
Current Challenges
• Currently, DTE Energy is working through a number
of regulatory issues
– Pending rate cases at both Detroit Edison and
MichCon
– Repairing Michigan’s Electric Choice program
16
Current Challenges Utility Rate Cases
Detroit Edison Residential Rates
versus Inflation
Rates
¢/KWh
Consumer
Price Index
(CPI)
12
11
10
•
•
9
Rates
8
1994
1996
1998
2000
2002
MichCon Residential Rates
versus Inflation
Rates
$/Mcf
•
Consumer
Price Index
(CPI)
2.75
2.50
2.25
•
Currently there are rate cases
pending at Detroit Edison and
MichCon
Neither utility has had a rate
case in over 10 years
Underlying both of these rate
cases are standard cost-ofservice issues driven by general
inflationary pressures and
rising health care and pension
costs
Both rate requests are
reasonable. Relative to
inflation, rates at both Detroit
Edison and MichCon have
declined substantially
Rates
2.00
1.75
1994
1996
1998
2000
2002
17
Current Challenges Status of Rate Requests
Detroit Edison
MichCon
Interim Rate Request
$504 million
$154 million
Base Rate Request
$553 million
$194 million
• Granted $278 million
–Increases 2004 net
revenues by $51 million
–$248 million base rate
increase
• Restart of the fuel clause
pass-through
Order expected late
July/early August
MPSC Staff Recommendation
on Final Rates
• Recommended $378 million
base rate increase
• Choice transition charges
• Mitigation sales margins to
offset Choice loss
Recommendation
expected late July
2004
Administrative Law Judge
Recommendation
Recommendation expected
late June/early July 2004
Recommendation
expected October 2004
Final Order
Order expected
September 2004
Order expected
December 2004
Status of Interim Request
18
Current Challenges Development of the Electric Choice
Program
• In June 2000, Michigan passed Public Act 141 (PA 141) which was
intended to be an initial step toward full deregulation
• PA 141 authorized the electric choice program, which allowed all
customers to select their generation supplier as of January 1, 2002
• In addition, all customer rates were frozen through 2003, with caps in
place for small commercial and industrial customers through 2004
and residential customers through 2005
• PA 141 also authorized the securitization of the Fermi 2 nuclear power
plant. The proceeds of $1.8 billion were used to repay debt and
repurchase stock
• Although the law was a well-intended economic development tool for
Michigan, it produced a set of unintended consequences
19
Current Challenges Development of the Electric Choice
Program (cont.)
•
•
•
•
The Michigan Public Service Commission (MPSC) undertook a series of
actions to promote a robust choice program:
– No return to service provisions were authorized, customers
essentially had a free option to switch between Detroit Edison and
alternative suppliers
– No transition surcharges were authorized for customers opting for
alternative suppliers
– Some customers received transition credits when opting for
alternative suppliers
Historically in Michigan, commercial rates are skewed higher, resulting
in a customer group that was very vulnerable to alternative suppliers
These factors produced an artificial Electric Choice market that is not
sustainable on a long-term basis
This artificial market creates a substantial negative financial impact for
Detroit Edison. It is estimated that the net lost margin for 2004 will be
$200-220 million
20
Current Challenges Recent Activity Regarding Choice
•
Detroit Edison
Electric Choice Program
(Gwh)
•
10,000
8,000
6,000
4,000
2,000
0
•
•
Through the rate case and legislative efforts,
Detroit Edison has been actively working to
resolve this issue
Recent regulatory activity has produced
some positive developments
– The interim rate order eliminated the
transition credits and imposed a small
transition charge
– The MPSC staff recommended a series
of return to service rules
– The Michigan Senate Energy &
Technology Committee held extensive
hearings regarding the implementation
of PA 141 and the Electric Choice
program
These steps have resulted in the leveling off
of Electric Choice levels
Despite these developments, the issue is not
fully resolved. Detroit Edison will continue
to work on the regulatory and legislative
fronts to ensure a level playing field for a
competitive Electric Choice program
21
Outline
• DTE Energy is a solid company with a consistent
long-term strategy
• DTE Energy is addressing its current challenges
• DTE Energy represents an attractive investment
opportunity
22
DTE Energy Represents an Attractive
Investment Opportunity
• DTE Energy is currently undervalued versus its peers
• The stock has a strong dividend yield of 5.2%
• Utility returns are expected to improve upon
resolution of the rate cases
• Non-regulated businesses will generate significant
cash flows
• Non-regulated businesses will continue their growth
• The balance sheet will remain strong
23
DTE Energy is Currently Trading at a
Significant Discount to its Peers
S&P Electrics’ P/E Multiples
Based on 2005 First Call Estimates
18
16
14
12
Median 12.7
10
8
6
4
2
0
24
DTE is Currently Providing a Strong
Dividend Yield Versus Other U.S.
Utilities
S&P Electrics’ Dividend Yield
June 2004
6%
5%
Median: 4.2%
4%
3%
2%
1%
0%
25
Utility Returns are Expected to
Improve
Illustrative Range of Outcomes
(assuming a full year of increased rates)
Detroit Edison
Equity Ratio
Equity Level (Billion)
Earned ROE
50%
$3.0
11.0%
50%
$3.0
11.5%
55%
$3.3
11.0%
Net Income (Million)
$330
$345
$363
50%
50%
52%
Equity Level (Billion)
$0.82
$0.82
$0.85
Earned ROE
11.5%
12.0%
12.0%
$94
$98
$102
MichCon
Equity Ratio
Net Income (Million)
• With the expected resolution
of the rate cases and Electric
Choice, utility returns are
expected to improve
• Detroit Edison’s
improvement will be
staggered as rate caps role
off
• Ultimately the utilities will be
allowed to earn reasonable
returns
26
NOTE: This should not be construed as earnings guidance
The Sale of our Synthetic Fuel
Facilities Will Provide Significant
Cash Flows
Expected Net Cash Flow from Synfuels
($US millions)
$445
$510
$530
$135
•
$135
•
($200)
2003A
2004E 2005E
2006E
2007E 2008E
Expected Net Income from Synfuels
($US millions)
$197
$150190
$200- $200230
230
$200230
•
•
Through 2008 our synfuel business is
expected to generate $1.8 billion in net
cash flow
The synthetic fuel facilities transform
marginal coal into high quality coal.
The favorable economics of this
business are driven by tax credits
DTE Energy is selling our interests in
these facilities in order to optimize the
cash generated
The redeployment of this cash will be
consistent with our overall investment
strategy. Options include:
– New business opportunities
– Debt paydown
– Share repurchase
$0
2003A
2004E 2005E
2006E
2007E 2008E
27
Waste Coal Recovery is an Exciting
New Growth Opportunity
Target Regions for Waste Coal
Recovery Technology
•
•
Site of DTE’s
first waste coal
recovery plant
•
•
•
In the United States, over one billion
tons of coal is sitting in waste ponds,
with 30 million tons added each year
In its current state this coal is unusable
and is an environmental liability
DTE Energy owns the right to a
proprietary technology that refines this
waste coal into a high quality product
that can be burned in power plants
Our first plant is operational, and
producing at a rate of ~250,000 tons per
year
We believe that net income of $20-40M
is achievable by 2008
28
Opportunities in Non-Conventional
Gas
•
Michigan Gas
Production
Region
•
Coalbed
Methane
Focus Areas
Cherokee Basin
Arkoma Basin
•
Landfill Gas (Biomass)
Facilities
Very high gas prices and a
tight supply situation in North
America requires a larger role
for non-conventional gas
production
DTE Energy is wellestablished in both Landfill
Gas (Biomass) and in
Michigan Gas Production and
is looking to make additional
incremental investments in
these areas
A newer area of focus is
coalbed methane where we
can leverage our Michigan
Gas Production experience
29
Other Non-Regulated Opportunities
On-Site Energy Projects
• Recently closed two on-site energy transactions
• Acquired the utility service assets at eight
DaimlerChrysler sites. Services include steam,
chilled water and compressed air under a 20-year
contract
• Acquired the on-site energy assets that provide
steam and electricity at a Kimberly-Clark tissue
mill under a 15-year contract
Coke Batteries
• Currently, we own interests in three coke
batteries which produce metallurgical coke for
the steel industry
• The global coke shortage has created new
opportunities in this business and we expect the
strong prices and tight markets to continue for
the longer term
30
Balance Sheet Strength and Stability
Will be Maintained
•
Cash from operations is
expected to improve as the rate
cases are resolved and the
synfuel facilities are fully
monetized
•
Going forward, the utilities will
be expected to cover their
capital expenditures and
dividends
•
Currently DTE Energy is
engaged in a cash
improvement initiative to help
ensure that after capital
expenditures and dividends,
the company is breakeven on a
cash basis
•
DTE has $1.5B in credit
facilities of which only $500M
is currently utilized
2004E
($ millions)
Low
High
Synfuel Production Payment*
$800
175
$1,050
225
Adjusted Cash from Operations
$975
$1,275
Capital Expenditures
Cash Improvement Initiative
Asset Sales
Dividends
(750)
100
40
(353)
(1,060)
100
40
(353)
Cash from Operations
Cash Flow
* Accounted for as ‘investing activity’
$12
$2
31
Summary
• DTE Energy is a strong company with a consistent
strategy and a solid asset base
• There are current challenges, but these are being
managed with resolution expected in the near
future
• The company represents an attractive investment
opportunity
32